Japan Sticking With Kuroda Will Bring Policy Continuity for Now

(Bloomberg) -- As its global peers navigate back to normal monetary policy, the Bank of Japan looks set to stay the course for now, with Haruhiko Kuroda at the helm for another term.

Reports that Kuroda will be joined by Masayoshi Amamiya and Etsuro Honda as deputy governors add weight to that view. But while analysts agree that Kuroda’s reappointment is likely to mean the BOJ’s radical easing continues in the short term, many analysts still expect future adjustments as the central bank tries to navigate the road ahead.

"The BOJ will continue to be careful about moving toward policy normalization with this new leadership," said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG and a former BOJ official. "Although some in markets are already speculating that policy tightening will come in the near future, the BOJ isn’t that optimistic given inflation remains subdued."

The government wants Kuroda to serve another term as governor, a senior government official told Bloomberg, adding that nothing has been finalized.

Kuroda and executive director Amamiya have worked closely together in crafting the current policy framework, and Honda is a committed reflationist with close ties to Prime Minister Shinzo Abe. Under them, massive monetary stimulus would be maintained for now, helping ease pressure on the yen and shore up Japanese stocks.

Abe is expected to nominate a BOJ governor and two deputies in coming weeks. Kuroda’s term ends on April 8 and those of his deputies end on March 19.

Kyodo News first reported on Friday that Kuroda would be reappointed, without saying where it got the information. Several Japanese news outlets have reported that Amamiya and Honda will likely be named his deputies.

While expectations for Kuroda’s reappointment are growing, Abe’s comments in parliament on Tuesday are reason for some caution. Although the prime minister has repeatedly expressed his confidence in Kuroda, he said the government has a "blank slate" when it comes to choosing the next governor.

Kuroda wasn’t directly asked about serving another term when he appeared in parliament shortly afterward. He reiterated that Japan’s economy needs persistent monetary easing.

Japan’s economy is doing well and inflation -- though well below the BOJ’s target -- is steadily rising. In this environment, the BOJ has faced growing speculation that policy normalization among its peers, and rising global bond yields, will lead it to begin normalizing policy, perhaps by letting interest rates rise.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, said the current yield-curve control settings won’t be sustainable forever. The BOJ may decide to let the 10-year yield fluctuate a bit further from its target, and to lower short- and medium-term rates to let the curve steepen, he said.

"I see a good chance they will do something at their gathering in late April," Kodama said.

Honda could make things more interesting by arguing for more aggressive easing. He said as recently as November that Abe should shake up the leadership at the BOJ, warning that the economy would be in "critical danger" if 2 percent inflation isn’t reached before a sales-tax increase scheduled for 2019.

Shirakawa said Honda’s appointment could cause "some nervousness" among market participants. 

"He is known for advocating doing more and he would probably urge closer coordination between fiscal and monetary policy -- like helicopter money," Shirakawa said. "If he proposes these things as a deputy, that will make investors wonder where the BOJ is going. That could make the yen stronger and lower stocks."

For now, though, the appointments of Kuroda, Amamiya and Honda would reassure markets about policy continuity, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. 

"The fact that the monetary easing path continues will be a positive for Japanese stocks,” Fujiwara said.

©2018 Bloomberg L.P.

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